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June quarter GDP “a mixed blessing”

06 September 2017

A recession is generally defined by economists as two consecutive quarters of negative GDP, an event which last occurred in Australia in 1991. During this recession, commonly known as the “recession we had to have”, a phrase coined by the then Treasurer Paul Keating, three out of the four quarters from the September 1990 quarter to the June 1991 quarter were negative. Australia has had the odd negative quarter, such as in the September quarter of 2016 and the March quarter of 2011, but not two in a row.

The latest figures released by the ABS indicated second quarter GDP grew by 0.8%, maintaining the year-on-year figure at 1.8% (after revisions). This figure was essentially in line with the median forecast of 0.8%-0.9% and well above the more pessimistic forecasts around at the end of August. (In their defence, the median forecast has risen from 0.5% just in the last week.)

Despite the figures being largely in line with median forecasts, bond yields and the Aussie dropped on the release of the figures. 3 year bond yields finished 5bps lower at 1.97% and 10 year yields were 7bps lower at 2.60%. The local currency dropped from 80.15 U.S. cents to 79.90 U.S cents and then drifted down further as the day progressed.

The quarterly figures were driven by exports and state government infrastructure expenditure, while business destocking acted as the largest drag.

ANZ senior economist Felicity Emmett said the figures represented a mixed blessing. “For policymakers, these numbers should provide some encouragement on the growth front but little on the inflation front.” She also said ANZ forecasts the RBA would be “on hold at least until end-2018.”

Deutsche Bank chief economist Adam Boyton agreed. “As far as headline GDP growth and the RBA is concerned, the through-year growth rate of 1.8% is in line with the 1.75% expected by the Bank in the August SoMP. He also picked on up the increasing prominence low wage growth is having in Australia and the likely response by the RBA. “Importantly for our view that the RBA will remain on hold over 2017 and 2018, these national accounts further confirm the weakness in wages growth. Indeed average earnings in the national accounts are up just 0.1% over the year, with the household sector remaining under some pressure.”

Another theme which has emerged in recent months has been the observation of the importance of population growth with regards to GDP growth. The following chart shows GDP growth on a per capita basis and readers will note a higher frequency of negative quarters, as well as a lower annual growth rate since the recession of 1990/91. While 2008/09 did not qualify as a recession, the annual growth rate was negative for a whole year. It appears as if Australia’s decades-old run of positive economic growth relied as much on population growth as it did on productivity or minerals prices.